Running the World's Markets: The Governance of Financial Infrastructure

Running the World's Markets: The Governance of Financial Infrastructure

Synopsis

The efficiency, safety, and soundness of financial markets depend on the operation of core infrastructure--exchanges, central counter-parties, and central securities depositories. How these institutions are governed critically affects their performance. Yet, despite their importance, there is little certainty, still less a global consensus, about their governance. Running the World's Markets examines how markets are, and should be, run.

Utilizing a wide variety of arguments and examples from throughout the world, Ruben Lee identifies and evaluates the similarities and differences between exchanges, central counter-parties, and central securities depositories. Drawing on knowledge and experience from various disciplines, including business, economics, finance, law, politics, and regulation, Lee employs a range of methodologies to tackle different goals. Conceptual analysis is used to examine theoretical issues, survey evidence to describe key aspects of how market infrastructure institutions are governed and regulated globally, and case studies to detail the particular situations and decisions at specific institutions. The combination of these approaches provides a unique and rich foundation for evaluating the complex issues raised.

Lee analyzes efficient forms of governance, how regulatory powers should be allocated, and whether regulatory intervention in governance is desirable. He presents guidelines for identifying the optimal governance model for any market infrastructure institution within the context of its specific environment.

Running the World's Markets provides a definitive and peerless reference for how to govern and regulate financial markets

Excerpt

The governance of infrastructure institutions in the financial markets has become a matter of significant commercial, regulatory, legislative, and even political concern. These institutions include exchanges (such as Istanbul Stock Exchange, nyse Euronext, and Stock Exchange of Thailand), central counterparties (CCPs) (such as EuroCCP, Japan Se- curities Clearing Corporation, and lch.Clearnet in the UK), and cen- tral securities depositories (CSDs) (such as the Canadian Depository for Securities, Indeval in Mexico, and Strate in South Africa). They play a fundamental role in ensuring the efficiency, safety, and soundness of financial markets globally, and more generally in furthering economic development. the manner in which market infrastructure institutions are governed critically affects their performance. There is great debate, however, both about how they are governed and about how they should be governed.

Nature of governance

Governance is about power, and three questions are critical in under- standing the governance of market infrastructure institutions: Who has what power at such institutions? How and why do they obtain it? and, How and why do they exercise it? Answers to these questions for any particular market infrastructure institution are determined in large part by the formal, legal, and regulatory constructs within which it oper- ates. These include the institution’s constitution and associated corpo- rate governance attributes, namely its corporate status and mandate, its ownership structure, the composition and role of its board, the role of its management, the rights of its shareholders and other stakeholders, and the relationships between board, management, owners, and other stakeholders. Other legal and regulatory factors also influence the exer- cise of power at a market infrastructure institution, including key con- tractual arrangements, its regulatory status, and any regulatory powers or duties it is allocated. in addition, a range of informal, nonconsti- tutional, and noncontractual factors may affect an institution’s gover- nance, such as the historical, cultural, and political framework within which it operates.